Some investors believe that income doesn’t matter.
If you’re a speculator who’s aiming for a 300 percent gain on a hot stock tip, then (some investors would argue): Who cares about a measly 3 percent dividend?
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If you can consistently – that is, over an investment lifetime – generate enormous capital gains regardless of market conditions… then congratulations, you’re in the top 0.0001 percent of all investors in history. And income would matter less.
But if you’re a mere investment mortal like the rest of us, dividends are probably critical to your returns. Over the past ten years, in many markets, dividends have been the only thing separating most investors from making money, and losing it.
For example, in terms of capital appreciation, Singapore equities have lost an average of 0.2 percent of their value per year over the last 10 years. But with compounded dividends, the return was 4.1 percent per year. That’s not a great return – but it’s a whole lot better than a negative return. (See the chart below for more.)
I’ll explain this in a minute. But first, understanding how a seemingly lousy 3 or 4 percent dividend yield can make such a big difference is a function of the most powerful force in finance: Compound interest.
The magic of compounding
Here’s how compounding works… you invest a sum of money that generates a steady return. But instead of taking that return and spending it, you reinvest it by buying more of the original investment. The next year both the original investment and the reinvested interest will earn interest, which you again reinvest.
With compounding, your original investment is growing in size due to repeated reinvestment, and every year you are getting a larger and larger sum of interest. It’s like a snowball rolling downhill, growing bigger in size as it picks up more snow on the way. (We recently wrote about this here.)
Compounding is why investors who opt to re-invest their dividends, rather than pocket the income, will have far better investment returns.
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What a difference income makes
As I mentioned, in some markets, over the past 10 years, dividends have accounted for more of your return, over the long term, than capital appreciation. Yes… a measly 3 percent yield contributed more to returns than the actual price appreciation of the underlying stock or market. And as shown below, in a few markets, investors would be losing money if not for dividends.
As shown in the figure above, Chinese stocks returned 3.4 percent per year based solely on capital appreciation. But with compounded dividends, they returned 7 percent annually.
Meanwhile, Asia Pacific ex Japan stocks returned just 2.3 percent of their value on the basis of capital appreciation. But with compounded dividends, they returned 6.2 percent.
The U.S. is unusual in that it’s the only market where you would have made more through simple capital appreciation than compounded dividends – thanks to the country’s bull market.
The difference in performance is astounding – and is one reason why investors should include high-quality dividend stocks in their portfolio.
So where can you find high-yielding stocks?
If you’re looking for dividend stocks… look to Asia.
As you can see in the chart below, there are 331 stocks from the Asia Pacific ex Japan region (that are part of the MSCI All Country World Index) that yield greater than 3 percent. Europe has just 208… and the U.S. has just 125.
So if you’re looking for high-yielding stocks, start your search in Asia for companies yielding 3 percent or more.
Remember, it might not seem like another 3 or 4 percent is worth paying attention to. But it could make all the difference, and also help you generate enormous returns over time.
Publisher, Stansberry Churchouse Research
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